In addition to the Financial Instruments and Exchange Law (the FIEL) effective September 30 2007, the Japanese Diet has amended various other laws to better protect the interests of consumers who engage in financial transactions. Several of these laws impose additional requirements on persons or entities that regularly engage in sales and other activities involving financial instruments (Financial Transaction Entities) for the benefit of consumers.
Recent amendments to the Banking Law, Insurance Business Law, and Trust Business Law (collectively, the Banking Law etc.) address some of the core concerns that resulted in the enactment of FIEL, including the need for consumers to be adequately informed of the risks associated with financial transactions. Although commonly associated with financial transactions, deposit agreements, insurance agreements and trust agreements are not categorized as "financial instrument transaction agreements" under the FIEL (As the beneficiary interest rights under trust agreements are deemed as securities under the FIEL, certain acts concerning trust agreements are regulated under the FIEL.) This distinction is largely due to the fact that existing laws already regulate certain activities (such as solicitations and execution of agreements) performed by banks and other financial institutions, insurance companies, trustee companies, and other regulated entities. However, recent amendments to the Banking Law etc. now provide that if a consumer will have exposure to any market risks by entering into such agreements (such as foreign currency deposit agreements), the consumer must have advance notice and sufficient explanation of such risks so that he can determine, on an informed basis, whether or not to conclude such an agreement. For example, when a consumer makes a foreign currency deposit, the amended Banking Law requires disclosing to the consumer that the value of the foreign currency deposited will change based upon fluctuations in the foreign exchange market. Because the Japanese Diet was concerned that the previous Banking Law, etc. failed to sufficiently protect consumer interests in financial transactions, it amended the applicable laws to incorporate by reference several FIEL regulations, including regulations that impose specific obligations to make disclosures and explanations.
In addition to revising laws that increase government regulation of Financial Transaction Entities, the Japanese Diet also amended the Law on Sales of Financial Instruments (the Law on Sales). Under this law, an injured party may bring a claim against any person or entity who regularly engages in selling and other activities concerning "financial instruments" (as that term is defined in the Law on Sales, not the FIEL) if such person or entity fails to provide the statutorily required explanation. Through this amendment, certain derivatives and other transactions which were not regulated by the previous Law on Sales are now subject to some of its requirements. Further, the amendments expanded the scope of matters to be explained and changed the means by which explanations are given. For example, under the amended law, the seller must provide the consumer with an explanation of the rights obtained and obligations incurred in purchasing a financial instrument if they may be affected by market conditions or the creditworthiness of the seller or other related entities. Further, the seller's explanation must be appropriate and sufficient in light of the consumer's (i) knowledge of and experience in financial instruments and transactions, (ii) assets and (iii) purpose for concluding the agreement.
Although the laws mentioned above strictly regulate Financial Transaction Entities, they also provide an exemption from certain requirements, including that concerning disclosure and explanation if the customer is a professional investor.
The recent enactment of the FIEL and amendments to related laws impose substantial obligations on Financial Transaction Entities. These entities, especially those subject to multiple regulations, (for example, when a trust company concludes a certain type of trustee agreement, it must comply with the FIEL regulation that is incorporated by reference into the Trust Business Law, regulations under the Trust Business Law, and regulations under the Law on Sales) must understand the specifics of all applicable regulations and seek to comply with them.
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